Austin Gets Upstaged, for Now

Ten years ago, Austin led Los Angeles on the deal-making front and barely trailed New York. (At the end of the second quarter of 2002, 88 Texas-based companies raised funding. During the same period, L.A., New York, Boston area, and Silicon Valley companies saw 86, 128, 250, and 441 companies funded.)

Recently, however, investment in Austin has dropped off noticeably. Eighty-one deals were closed in the entire state of Texas in the first two quarters of this year. Meanwhile, during the same period, L.A., New York, Boston area, and Silicon Valley companies sewed up 126, 182, 221, and 514 deals, respectively, according to MoneyTree data.

One successful entrepreneur who recently moved back to Silicon Valley from Austin attributes Austin’s slowing deal pace to its enduring focus on enterprise technology, while the rest of the world became swept up in the consumer Web.

“If I took all of the smartest consumer Internet people in town and put them in the same room, you’d end up with about 20 people,” says the entrepreneur, who asked not to be named. More, he says, “Of those 20, 10 are successful in their own right, don’t need VC, don’t care, and aren’t trying to build the next billion dollar thing. They’re happy making $20 million a year.”

The entrepreneur further suggests a degree of complacency that might seem anathema to founders and employees toiling in other tech centers. “While there’s a subset of people in Austin who will work 24 hours a day for a bigger vision, [a much larger number] are accustomed to working 9 to 6,” he says. “They have a family and a big pool in the backyard, and they’re content.”

Steve Felter, CEO of the gaming company GameSalad, which is headquartered in San Francisco but maintains an office in Austin, where it was founded, doesn’t think working only eight or nine hours a day is such a bad thing.

“In the Bay Area, I’ve seen that kind of stereotypical thinking, with people working for equity and doing whatever it takes to get things done,” says Felter, who doesn’t live in Austin but spends plenty of time shuttling between both cities. “We think it’s important for [employees’] productivity and longevity to strike a work-life balance, and we’re actually able to attract a lot of people because of that,” he adds. “When people say, ‘I have a couple of kids; don’t expect me to work past midnight,’ we get it.”

Still, even Felter acknowledges that Austin is lagging behind other cities such as New York, L.A, and Silicon Valley because it “just doesn’t have the VC ecosystem like in the Bay Area” or, increasingly, New York.

“I’ve talked with a lot of VCs I respect and if you’re not a Silicon Valley-based company, it’s hard for them to get excited about your company. When you’re earlier stage, they want proximity to you, to be able to have coffee with you in the middle of the week. It’s hard to replace that with a phone call.” (GameSalad has raised $7.1 million, most of it after moving its own headquarters out of Austin.)

However, not everyone is willing to cede that Austin is losing ground as a startup mecca. In fact, some argue that the city is more attractive than ever. Tom Ball, a general partner at Austin Ventures, moved from San Francisco to Austin seven years ago, and he says he’s seeing “more activity, more good deals, and more good entrepreneurs” than ever before.

Ball thinks it’s entirely possible that Austin has dropped from the headlines because there’s “more hype” coming out of other markets, including New York and L.A. “In Austin,” says Ball, “you kind of do your work and let it speak for itself.”

As for Austin’s focus on enterprise software, Ball calls it a plus, saying he has seen “Valley guys come through town recently looking at deals, probably more [so] than in the last two years, and I think it’s because [of Austin’s focus on] the next generation of enterprise.”

Ball also points to a couple of recent consumer successes, including still-private WhaleShark Media, a five-year-old online couponing giant in Austin Ventures’ portfolio. He also highlights HomeAway, which specializes in vacation rentals and held a very successful public offering last year (Austin Ventures owned 24.4 percent of the company at the time) and BazaarVoice, which held its IPO in February. (BazaarVoice manages online customer reviews and communities for corporate clients. Austin Ventures owned 25.5 percent of the company at the time of its offering.)

“These big liquidity events around town feel to me like they’ve opened up a new slew of angel investors and executives who are [wondering], ‘What do I do next?’” says Ball.

It’s true that “Austin is not Silicon Valley, but nowhere is,” says investor Mike Maples, when I ask him about the city where he lived for many years. (Maples worked at Tivoli Systems and co-founded the service management software company Motive; since becoming a venture investor, he has made numerous investments in the area.) More, he says, “Austin hasn’t lost a Facebook or a TaskRabbit to the West Coast like Boston has. And [Austin has] had a wealth of exits, broadly distributed across business and consumer.”

Indeed, Maples tells me that he continues to look at Austin as “a major area of focus” and that he doesn’t “buy the premise” that Austin is slipping in stature. “Most of the people I see in Austin complaining about the local tech scene are whiners. They blame other factors when they can’t get their companies funded.”

I ask the recently relocated entrepreneur about Maple’s last sentiment. He tells me, “Mike is right. There are a lot of whiners, people who’ve never built anything but want to be the next Facebook.”

Still, says this person, “There’s a reason Maples left” for the Bay Area in 2006.

“I think it’s a question of whether you want to be in the center of the universe of not. If you’re going to get bought by Google, it’s not going to happen [in] Austin.”

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